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TMI Blog2007 (2) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under: 3. The 1st ground in appeal No. 784/Pn/2000 is that the learned Commissioner (Appeals) erred in disallowing the proportionate land lease charge of ₹ 46,163 in respect of its long-term lease. In the course of hearing before us, it was pointed to us that this issue is decided against the assessee in its own case in ITA Nos. 1246/Pn/1995, and 157 & 158/Pn/1997 for assessment years 1992-93 and 1993-94 and these decisions were followed in ITA No. 671 /Pn/1991 for assessment year 1995-96. Respectfully following those decisions, this ground of appeal is dismissed. 2.3 In the light of the arguments advanced by the learned Counsel for the assessee and finding that the issue is already decided against the assessee by this Tribunal in assessee's own case in earlier assessment years, as admitted by the assessee itself, we decide this issue against the assessee. 3.1 Ground Nos. 2 and 3 are as under: 2. The learned Commissioner (Appeals) erred in rejecting the contention of the appellant that the portion of entertainment expenses attributable to the employees of the appellant, as estimated at 50 per cent of business lunch expenses fell outside the scope of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 1168/Pn/1997, and ground No. 4 of the appeal in ITA No. 784/Pn/2000 are against the finding of the learned Commissioner (Appeals) that provision made for warranty obligations is a contingency liability, not deductible in computing the income. In the course of hearing before us, it was pointed out that in the order for assessment year 1995-96, in ITA No. 1246/Pn/1995, this matter was remitted to the assessing officer with a direction to decide it afresh after examining the facts of the case and considering the order of the Tribunal for assessment year 1992-93, in that order it was inter alia held that the provision for warranty expenditure was not a contingent liability, it was further pointed out that the quantification of the provision will have to be examined by the authorities below by finding out the actual expenditure incurred against the provision or by following some other objective criteria. Respectfully following that decision, the matter is remitted to the file of the assessing officer for fresh adjudication to be made after hearing the assessee. Thus, these grounds are treated as allowed for statistical purposes. 4.3. In the course of hearing, it was pointed out b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter is restored to the file of the assessing officer with a direction to obtain appropriate certificate regarding incremental liability for the previous year ended on 31-3-1996, and allow the same in computing the income. Thus, this ground of appeal is treated as partly allowed. 5.3 In the course of hearing, it was pointed out by the learned Counsel for the assessee that no fresh or different facts were found by the assessing officer compared to earlier year. The learned Departmental Representative has also not been able to point out that the facts of this case for this year are different to that of assessment year 1994-95. Respectfully following the Tribunal's order in the assessment year 1994-95, we decide this issue in line of the terms of the order of the Tribunal order dated 17-3-2006 in ITA No. 1168/Pn/1997 for assessment years 1994-95 by remitting the matter to the file of the assessing officer with a direction to ascertain incremental liability by making actuarial valuation for the previous year ended on 31-3-1997, and allow the same in computing the income. 6.1 Ground No. 6 raised by the assessee is as under: 6. The learned Commissioner (Appeals) erred in disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amages under contractual terms on that account is a well known incident. Furthermore, in view of the involvement of technical issues on both the sides namely, manufacturer and the buyer of the large plants/equipments invariably negotiations take place between the company and the parties concerned for eventual crystallization and settlement of the liquidated damages despite the specific Clause relating thereto which prima facie is legally enforceable. Thus, very often the amount of liquidated damages determined for final settlement is lower than the amount as quantified in terms of the Clause relating thereto. This scaling down of the amount of liquidated damages as quantified on the facile application of the relevant Clause in the contract is estimated on careful consideration of the pros and cons of the circumstances of delays/defaults on both sides by the principal engineer-in-charge of respective contract execution and 'provision is eventually made by the accounts department in the books on the basis of such authoritative estimate as accrual. We must also add that the provision is in conformity with the mandatory AS 7 issued by the ICAI. Para 14.2 of the accounting standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account on account of liquidated damages was reasonable and correct in line with the accrual basis of accounting. 6.3 After considering the submission of the assessee, the assessing officer disallowed the assessee's claim by observing as under: I have considered the submission and found that the same is not acceptable. The assessee has filed no evidence that the provision made is actually payable. There is no certainty even on the quantum of provision made by the assessee in its books of accounts. In the case of Cochin Refineries itself liquidated damages are only ₹ 7,90,000 as against a provision of ₹ 10 lakhs made by the assessee. The provision made by the assessee is therefore contingent in nature and may or may not be payable. These provisions made are therefore not allowed. However, assessee will be entitled to claim liquidated damages paid as and when these are actually paid. Disallowance of ₹ 70,43,560 is therefore made to the income of the assessee (Actual amount is ₹ 40,73,560). 6.4 From the discussion made by the assessing officer in the body of the assessment order, it is seen that the assessing officer has taken the amount of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the assessing officer's order and a number of decisions of the various High Courts and Supreme Court, the Commissioner (Appeals) has confirmed the assessing officer's order. While deciding the issue against the assessee, the Commissioner (Appeals) has made following observations at: Pages 10 and 11: I have considered rival submissions. As per the contract between the appellant and its customers, the amounts billed to the customers indicate amounts covered by delivered of goods and rendering of services, upto a pre-determined stage of the total project. Thus, the entire amount inclusive of liquidated damages becomes due to the appellant. At this stage, there is no claim created against the appellant by way of any liquidated damages on the basis of the terms of the contract. At this stage, therefore, there is no cause of action in the hands of the customers so as to lawfully retain or claim the agreed of liquidated damages. At this point of time, the said customers do not actually forfeit and also have no right to the liquidated damages nor has the appellant foregone the claim of such money. Since the appellant follows mercantile method of accounting, at this stage, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily be taxed no sooner the right to receive the same is vested in the appellant or when it is actually received, whichever is earlier. Although the charge of income-tax is on accrual and/or receipt basis, the earlier opportunity must be availed by the assessing officer because there is no choice available to assessing officer to tax the income on subsequent receipt basis.... Pages 23, 24 and 25: Finally, when the customers of the appellant find, after commissioning/completion or erection of the system or plant and machinery as the case may be, that the Clause relating to liquidated damages is to be invoked as the performance of the appellant company was not completed within the agreed timeframe, the customer may foreclose the bank-guarantee or the bond issued by the appellant company, representing "the amount of performance warranty or liquidated damages, whatever the name be. This may or may not be accepted by the appellant. When the issue is finally decided that the appellant is to bear the cost of its performance inadequacies or after the appellant's admission to that effect, such amount becomes for the first time, due from the appellant to its customers. Only at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts in the year under consideration and, as such, the provision for corresponding liability of damages payable for the delay in completing the work has been accordingly made in the accounts of that year. In support of the assessee's claim that the deduction for liquidated damages for delay in executing the work is allowable as deduction when a condition regarding date of delivery or executing the work is breached, the assessee has referred and relied upon the following decisions : 1. K.C.P. Ltd. v. ITO (SB); 2. F.F.E Minerals India (P) Ltd. v. Jt. CIT; 3. Kaveri Engg. Industries Ltd. v. Dy. CIT (1992) 43 ITD 527 (Mad). 10.1 The learned Commissioner Departmental Representative, Shri Pradeep Sharma, on the other hand, submitted that the claim for damages of breach of contract is not a claim for a sum presently due. The liability to pay damages would not arise until the liability is adjudicated upon the damages assessed. In support of the contention advanced by the learned Commissioner Departmental Representative, reliance was placed on the decision of Hon'ble Madras High Court in the case of CIT v. Seshasayee Industries Ltd., wherein the decision of the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract does not incur eo instanti a pecuniary liability nor does the injured party becomes entitled to claim a debt. He is only entitled to sue for damages and have adjudicated upon'. 2. In case of an assessee following the mercantile method of accounting a liability is said to be incurred when the dispute between the parties is amicably settled or finally adjudicated when the liability in question is not a statutory liability. Our reply: The undersigned quoted the decision of Hon'ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd. Civil Appeal No. 7419 of 2001 (photocopy enclosed) in the course of the hearing before Your Honours on 15th December instant and which is directly on the issue and is in favour of the appellant. In the said decision the Hon'ble Supreme Court has referred to the observation in other case of Raman Iron Foundry, (kindly refer p. 24 para 50 of the photocopy enclosed) wherein the abovesaid interpretation cited by the departmental Representative has been produced. However, their Lordships have observed that in the case of Kamaluddin Ansari & Co. v. Union of India and Ors. the three Judge Bench of this court (Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made as per the Clause in the contract and is not unliquidated damages or penalty which given right to sue for the damages and therefore there is no time lag in the ascertainment of liability of the appellant to pay liquidated damages to its customers. (7) the appellant has accounted for and offered to tax the entire sale income and therefore provided for the liquidated damages on occurrence of delay on its part in supplying the material to the customer. In the light of the aforesaid facts and circumstances it is submitted that the liability is incurred by the appellant in the ordinary course of its business and is certain. The claim for deduction is not that of a disputed liability. Reliance is also placed for the purpose on the favourable decisions in the following cases : (1) K.C.P. Ltd. v.; (2) Kaveri Engg. Industries Ltd. v. Dy. CIT (1992) 43 ITD 527 (Mad); (3) F.F.E Minerals India (P) Ltd. v. Jt. CIT; (4) CIT v. Indian Transformers; (5) CIT v. Vinitec Corporation (P) Ltd.; (6) Bharat Earth Movers v. CIT. 11. We have considered the rival submissions of both the parties and have perused the orders of the authorities below. We have carefully perused various p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it necessary to have a look to the settled position of law laid down by various courts in this behalf. 14.1 The Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT has taken a view as under (Extracted from headnote). Held (i) that the undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the fact that time was not of the essence of the contract, means a reasonable time) was unconditional, the appellant binding itself absolutely to carry out the same. That undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount so expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one because it was always open to the income-tax authorities concerned to arrive at a prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Apex Court that if a certain act or event has imported a definite and absolute liability on the assessee, that liability would be an accrued liability and would not convert into conditional one merely because the liability was to be discharged at a future date. It was further observed by the Hon'ble Apex Court that there might be some difficulty in estimating the liability but that would not convert an accrued liability into a conditional one, and it is always open to the taxing authority concerned to arrive at a true estimate of the liability having regard to the circumstances of a given case. 15. In Metal Box Co. of India Ltd. v. Their Workmen , the appellant company estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the Profit and Loss a/c. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future date on which the liability shall have to be discharged is not certain. 17. The principles laid down by the Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. (supra) have been applied by the Hon'ble Gujarat High Court in the case of Amrish & Co. v. CIT where some of the principles laid down by the Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. (supra) were discussed as under (Extracted from headnote): Some of the principles laid down by the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen are that (1) for an assessee maintaining his accounts on the mercantile system, a liability already accrued though to be discharged at a future date would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid; (ii) just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment so also liabilities accrued due would be taken into account while working out the profits and gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the warranty period and require work under warranty; that since theoretical contingencies could be disregarded, the taxpayer was in the year of sale under an accrued legal obligation to make payments under those warranties and even though it might not be required to do so until the following year, it was definitely committed in the year of sale to that expenditure; and that accordingly in computing the profits or gains derived by the taxpayer from its business in the year in which the vehicles were sold, the taxpayer was entitled under Section 104 to deduct from its total income the provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of vehicles sold in that year. 20. Regarding the warranty liability, the Privy Council further observed as follows: The evidence of accounting practice adduced before Doogue J. left no doubt about the proper treatment of the outstanding warranty liabilities. They were part of the cost of the vehicle sales and the therefore so far as capable of reasonable estimation should be matched against the corresponding revenue. The evidence satisfied the Judge that a reasonable estimate could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses during the previous year can be considered as an expenditure deductible for income-tax purposes has been emphasized. It has also taken into consideration that a liability which is dependent on fulfilment of a condition cannot be allowed as a deduction unless the dependent condition is fulfilled during the previous year. In the case of warranty liability, it is found that the assessee when it sold the goods manufactured by it, conferred on the purchasers the benefit of a warranty, and thereby the assessee undertakes to provide free maintenance or replacement of its parts within a particular period on sale of the goods. The contention of the revenue that the liability was contingent upon a defect appearing and being notified within the warranty period and till such time there was no liability in law and, therefore, the claim for deduction on account of estimated liability could not be allowed has not been accepted by the courts by holding and observing that once the liability arising on account of warranty claims is in-built in the sale mechanism itself, it cannot be viewed that it is contingent in nature. It was further held by the court that a contingent liability is to be unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurring of the liability. The definite liability must be in praesenti and not de futuro. The liability must have arisen under a definite obligation. The obligation of the trader must not be of purely contingent in nature for it to be a permissible outgoing or allowance or deduction in the year of account. It is further clear that the putting aside of money, which may become expenditure on the happening of an event, is not admissible expenditure. The expenditure which is deductible for income-tax purpose is one which is towards a definite and certain liability actually existing at the relevant time. Therefore, a pure contingent liability distinguished from a definite and actual liability arising in praesenti, does not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. The other condition to be satisfied is that the definite liability in praesenti should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these conditions are satisfied, it does not make any difference if the liability may have to be discharged at a future date, and the future date, on w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessing officer has rejected the assessee's claim of liquidated damages for the following reasons: (1) The assessee has filed no evidence, that the provision made is actually payable, (2) There is no certainty even on the quantum of provision made by the assessee in its books of account. He has given an instance of Cochin Refineries Ltd. where liquidated damages ultimately paid were of ₹ 7,90,000 as against provision of ₹ 10 lakhs made by the assessee, (3) The provisions made by the assessee were contingent in nature and may or may not be payable, (4) However, the assessee will be entitled to claim liquidated damages paid by the assessee to its parties as and when they were actually paid. 24.4 On the other hand, the Commissioner (Appeals) has rejected the assessee's claim by saying, inter alia, that the claim, if any, against the assessee for delay in installation of the system is purely and wholly dependent upon contingency of further negotiations and mutual acceptance of the final amount of liquidated damages. The Commissioner (Appeals) has further observed that since such contingency has not arisen during the relevant accounting year, as admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of the deeds of sale was held to have been accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. In this case, the Hon'ble Supreme Court further held that it was an accrued liability, and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed, and the difficulty in the estimation thereof did not convert the accrued liability into a conditional one, because it was always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case. In this case, the Hon'ble Supreme Court has given emphasis on the assessee's own unconditional undertaking to carry out development works within six months from the dates of the deeds of sale whereby the assessee bounded itself absolutely to carry out the same, though the work was to be carried out within six months from the deeds of sale. The very undertaking given by the assessee to carry out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt itself. In this case, it was held that the taxpayer was in the year of sale under an accrued legal obligation to make payments under warranty claims, even though it might not be required to do so until the following year. It was further held therein that in computing the profits or gains derived by taxpayer in its business in the year in which the vehicles were sold the taxpayer was entitled to deduct from its total income the provision which it had made for the cost of its anticipated liabilities under outstanding warranties in respect of the vehicles sold in that year. In the case of warranty, although it cannot of course be predicted whether any particular vehicle will turnout to be defective or how serious the defect will be, the taxpayer can make a reasonably accurate forecast based on previous experience, of what will be the total cost of remedial work for all the vehicles sold in a given year. In these cases, a view was therefore taken that the anticipated liabilities under unexpired warranties when estimated with reference to statistical information would be a charge on the profit arising from the sale of the goods in respect of which warranty was given and thus, have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inadequacies by paying liquidated damages and after the assessee's admission to that effect such amount would become for the first time due from the assessee to its customers is concerned, we find that this contention of the department is not based on the correct facts of the present case and the position of law as enunciated in the above referred decisions. In the present case, the assessee has never disputed its liability to pay liquidated damages on account of causing delay in completing the works. As far as the assessee's liability to pay liquidated damages for causing delay in executing the contract works, no dispute has ever been raised by the assessee. There could be a dispute only with regard to the exact quantification thereof, but that by itself would not convert the definite liability into a contingent one. There is no dispute as to the proposition that when there is a dispute between the parties as to importing a liability on one party, a liability can be said to have actually and definitely incurred only when the dispute between the parties is amicably settled or finally adjudicated in case where the liability in question is in the nature of contractual liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. In this case, it was not in dispute that in terms of the agreement of the assessee for supply of the goods, time was the essence of the contract and any delay in the delivery of the goods would result in the liability to pay damages. In the light of this Clause of damages for delay, the Tribunal held that the claim for damages arises at the point of breach, but the quantification of the damages may be subject to negotiation. It was further held that as far as the concerned liability to pay damages arose at the point of time when the breach occurred, i.e. when it failed to deliver on the due date, and at that point of time the liability accrued which, as a prudent trader, it could quantify and take into account by means of a provision. The decision of K.C.P. Ltd. v. ITO (supra) was followed to by the Tribunal, Madras Bench in the case of Kaveri Engg. Industries Ltd. v. Dy. CIT (supra), where the facts were summed up as under: (a) the assessee, in some instances, did delay the delivery of the goods which it had contracted to supply. The assessee did not deny the said factum of delay. (b) As a direct consequence of its failure to stick to the stipulated delivery schedule, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting where it is provided as under: (i) Prudence. - Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. From the said circular, it is thus clear that the department has itself accepted the principle that a provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. 26. Thus, in the present case before us once the liability arising on account of liquidated damages for delay caused by the assessee in erecting or commissioning the work accepted by the assessee to do is in-built in the contract agreement itself, and it has arisen on the happening of the delay in executing the contract works and its valuation is possible to be made with reasonable certainty and since the corresponding sales revenue of the said contract works has been accounted for in the given period, this liability arising on account of liquidated damages for delay caused in erecting or commissioning the work cannot be viewed that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The commentary referred to above reads as under: A claim for liquidated damages stands on the same footing as a claim for unliquidated damages. A claim for unliquidated damages does not give rise to a debt until the liability is adjudicated upon the damages assessed. A party in breach of contract does not incur eo instanti. a pecuniary liability nor does the injured party become entitled to claim a debt. He is only entitled to sue for damages and have them adjudicated upon. 27.2 In this commentary, a reference has been made to the decision of Union of India v. Raman Iron Industries (supra). 27.3. In a reply to the departmental aforesaid contention, the learned Counsel for the assessee has drawn our attention to the decision of the Hon'ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd. Civil Appeal No. 7419 of 2001. In this latter decision of the Hon'ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. (supra), the Hon'ble Supreme Court has made a reference to its decision in the case of Raman Iron Industries (supra) at para 50 of the order, and has observed that in the case of Raman Iron Industries (supra), the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GC: (i) there is a specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract; (ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed; (iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages; (iv) on the request of the respondent to extend the time-limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered; (v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor; (vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable; (vii) in certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot a statutory liability. 28.4 In both these cases of Hon'ble Gujarat High Court, i.e. the cases of CIT v. Ashwin Vanaspati Industrial (P) Ltd. (supra) and the case of Alembic Chemical Works Ltd. v. Dy. CIT (supra), a reliance has been placed upon a decision of the Hon'ble Supreme Court in the case of CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (supra), which was also rendered in the background of the fact that there was a dispute as to the payment of bonus to the employees and, thus it was held that since the dispute was settled by the award of the Industrial Tribunal in the year of 1949, deduction of the payment of bonus had to be given in the calendar year 1949 only. 28.5 In the case of CIT v. Ratlam Strawboard (P) Ltd. (supra), the claim of damages for not supplying the goods within a stipulated time was disputed by the assessee, and the matter was referred to an arbitrator and, in this background, it was so held that the liability on account of damages payable to the assessee's customer would be allowed in the year when the claim is finally settled. 28.6 In the case of CIT v. Phalton Sugar Works Ltd. (supra), the Hon'ble High Court has held that where a li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting year has imported an accrued liability on the assessee, for which a reasonable provision made in the books of account is deductible, while computing the profit from the said contract works, of the year under appeal, though that liability was to be discharged at a future date. 28.9 The view we have taken above is further strengthened and supported by the logic or the reasoning that is being applied in holding that the monies retained by the contractee from the bills raised by the contractor till the obligation of satisfactory completion of the contract work is fulfilled would not amount to income of the contractor of the year in which the amount is retained. 28.10 On the issue relating to the question as to when the contractor has acquired a right to receive the retention money deducted by the contractee from its bill raised for executing the contract work till the contract work has been satisfactorily completed, a reference may be made to a leading decision rendered by the Hon'ble Calcutta High Court in the case of CIT v. Simplex Concrete Piles (India) (P) Ltd. . In this case, the assessee, a contractor, carried on the business of concrete piling for building. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd when the assessee had no right to receive money by virtue of the contract between the parties, and the assessee also had no right to enforce payment, it could not be said that the right to receive payment of the remaining 10 per cent of the value of job had accrued. 28.12 A similar view has also been taken by the Hon'ble Madras High Court in the case of CIT v. Igniped Boilers (I) Ltd. (2006) 283 ITR 295 (Mad). 28.13 The aforesaid decisions of the Hon'ble Calcutta High Court and Hon'ble Madras High Court have been followed by the Hon'ble jurisdictional Bombay High Court in the case of CIT v. Associated Cables (P) Ltd., where it has been held that the payment of retention money in the case of contract is contingent on satisfactory completion of contract work and the right to receive retention money accrues only after the obligations under the contract are fulfilled and, therefore, it would not amount to income of the assessee in the year in which the amount is retained. In this decision of the Hon'ble Bombay High Court, a reference has also been made to a judgment of the Tribunal in Associated Cables (P) Ltd. v. Dy. CIT (1994) 206 ITR 48 (Bom) (TM) (AT). 28. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd., it has been provided that the assessee company shall be liable to pay liquidated damages @ 0.5 per cent of the contract value of the boiler per day of delay or part thereof subject to a maximum of 15 per cent of the contract value of that boiler. It is also provided therein that all sums payable by way of liquidated damages under any of the conditions shall be considered as reasonable compensation without reference to the actual loss or damage which shall have been sustained. 29.3 In the contract agreement entered into with Kanoria Chemicals & Industries Ltd., the Clause of liquidated damages states that in the case of delay in commissioning of the complete equipment beyond 25-10-1995, liquidated damages @ 1 per cent (one per cent) per week subject to a maximum of 10 per cent of ex-works price shall be applicable. 29.4 In the case of Madras Fertilizers Ltd., liquidated damages are leviable @ 0.5 per cent per week or part thereof, subject to a maximum of 5 per cent of the total value of the contract, if the boiler parts of 110 Ata Boiler Package is not delivered by the end of 18th month. 29.5 In the case of Chemical & Plastic India Ltd.. provision has been made only of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medabad Bench in the case of Aarti Industries Ltd. v. Dy. CIT (2005) 95 TTJ (Ahd) 14. 30.4 We have heard both the parties and have gone through the orders of the authorities below, 30.5 We have perused the above referred consolidated order of the Tribunal, Pune Bench, Pune dated 17-3-2006 in the assessee's own case for assessment year 1996-97 in ITA No 784/Pn/2000 for the assessment year 1996-97 and ITA No 1168/Pn/1997 for the assessment year 1994-95. The relevant para of the Tribunal's order relating to the issue in question before us is reproduced as under: 9.5 Appeal No. 784/Pn/2000 involves yet another issue, namely, whether excise duty refund of ₹ 19,05,499 is caught within the mischief of Clause (baa) of the Explanation to Section 80HHC. The learned Counsel relied on the decision of Hon'ble Tribunal, Ahmedabad Bench, Ahmedabad, in the case of Aarti Industries Ltd. v. Dy. CIT (2005) 95 TTJ (Ahd) 14, in which it was held that the excise duty refund is not hit by the aforesaid provision. No particular argument was made by the learned Departmental Representative in this matter. Respectfully following that decision, this issue is decided in favour of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se are to be included in the total turnover of the assessee. The assessee has not given any details in support of its contention as to why these client balances written back by the assessee are not to be considered as part of assessee's turnover. The order of the Commissioner (Appeals) on this issue is, thus, upheld. 31.5 The next item is of compensation for cancellation of order amounting to ₹ 11,37,500. 31.6. We have heard both the parties and have gone through the orders of the authorities below. 31.7. Orders were placed by the assessee's customers for purchase and supply of various goods or executing the jobs. Since these works entrusted to the assessee were cancelled by the customers, the assessee received compensation on account thereof. It is, thus, clear that it directly related to the operating activities of the assessee's business. The goods or the works that were to be supplied or executed by the assessee would have certainly been part of the assessee's total turnover. Therefore, any surplus or compensation received by the assessee in connection thereto should also be treated as assessee's turnover accordingly. Therefore, this issue is decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- Write back suspense account 2,82,041 ---------------------------------------------- Warehouse charges 27,55,000 ---------------------------------------------- Service charges received 1,86,12,362 ---------------------------------------------- Total 2,19,24,374 ---------------------------------------------- 32.2 As far as the items of cash discount and write back suspense account are concerned, the learned Counsel for the assessee submitted in the course of hearing of the appeal that the grounds relating to these two items may be dismissed as not pressed for. 32.2.1 After hearing both the parties, we, therefore, dismiss the ground relating to these two items by confirming the order of the Commissioner (Appeals) holding that 90 per cent of these amounts are to be deducted from the profit for the purpose of computing the deduction under Section 80HHC of the Act. 32.3.1 The next item is with regard to the warehouse charges recovered. The learned Counsel for the assessee has submitted that warehouse charges recovered represent recovery of corresponding costs and, therefore, are in the nature of operational income. 32.3.2 The learned Departmental Representative, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilers. He, therefore, submitted that these are in the nature of operational income. He further invited our attention that these receipts have been held to be even entitled to deduction under Section 80-IA in respect of self-manufactured boilers, vide Tribunal's consolidated order dated 17-3-2006 for assessment years 1994-95 and 1996-97, vide ITA Nos. 1168/Pn/1997 and 784/Pn/2000. 33.2 The learned Departmental Representative, on the other hand, supported the orders of the authorities below. 33.3 Since service charges have been held by us in this order to be part of the total turnover, that would by itself imply that these receipts are directly related to the main business activity of the assessee and, therefore, these are not to be deducted to the extent of 90 per cent from the profits for the purpose of determining deduction under Section 80HHC of the Act. The assessing officer shall modify the deduction under Section 80HHC accordingly. 34. Ground Nos. 8 and 9(a) relating to deduction under Section 80-IA were not pressed by the learned Counsel for the assessee. In the note given by the assessee, it is also mentioned that these grounds are not being pressed. Therefore, the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is decided against the assessee. 36.5 The next item is with regard to warehousing charges for the purpose of computing deduction under Section 80-IA. This issue has been restored back to the file of the assessing officer while deciding the issue in the context of Section 80HHC of the Act vide our this order. Consequently, to ascertain the true and correct nature of the warehousing charges, we also restore this issue back to the file of the assessing officer for the purpose of computing deduction under Section 80-IA also. 37.1 Ground No. 9(d) is directed against the Commissioner (Appeals)'s order in confirming the exclusion of benefits received by the assessee in respect of deemed export as detailed below: -------------------------------------------------------- Particulars Amount (Rs.) -------------------------------------------------------- REP licence 2,89,463 -------------------------------------------------------- DGFT claim 3,91,830 -------------------------------------------------------- DGFT claim 12,37,170 -------------------------------------------------------- Excise duty claim 7,38,529 -------------------------------------------------------- Total 26,56,992 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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